Amidst a business transformation, Alcoa (NYSE: AA) reported a first quarter EPS of $0.28 a share on revenue of $5.82 billion for the fiscal year 2015. The reported quarterly earnings beat analysts’ expectations that were expecting Alcoa to show an EPS of $0.26 a share on revenue of $5.94 billion. This was largely due to its smelting division that was heavily aided by favourable exchange rates.
Making the shift from traditional smelting and refining to value-added businesses such as automobiles and aerospace, Alcoa reported a first-quarter profit in terms of earnings but a lower-than-expected revenue that slightly missed the analysts’ estimates. Let’s get to understand the facts shared during the first quarter’s earnings call.
Diversified business operations stimulate earnings growth
Alcoa, a New York-based company and the world’s biggest aluminium company, reported profits of $195 million, or $0.14 per share, compared to 12 months ago where a loss of $178 million or loss of $0.16 a share was reported.
According to its recent earnings report, Alcoa credited positive foreign currency exchange rates, a drop in energy costs in Spain and improvements to their productivity as the major factors attributing to their better performance.
This March, the company reported that it has decided on selling up to 500,000 tons of its smelting inventory or 14% of its total stock. In fact, the company has been taking cost cutting initiatives in the past by closing smelters in their American, European and Australian markets where energy costs are relatively higher. And besides the other units that concentrate on the automobile and aerospace sectors and have remained profitable, the smelting division reported earnings of $187 million, compared to $15 million loss in the year earlier.
Alcoa’s strategic diversified portfolio of business activities actually ensured generation of steady revenue stream. On April 8, Alcoa commented that its average third-party price rose 10% to $2,420 per ton. A reassessment of the total demand last year had Alcoa raise the growth from 7% to 9%, up to 54 million tons. This demand is helping to suck up the increase in the exports coming from China.
Alcoa’s positive outlook was reflected by Alcoa’s chairman and CEO, Klaus Kleinfeld who added, "When you lift the hood on the profit side, you see a record performance on the upstream side. Again, super, super good first quarter. And you see a very, very good performance on the downstream side."
Focus is on aerospace and automotive unit
The aerospace division that makes aluminium parts for airplanes reported earnings of $191 million, almost 1% up from that reported a year ago.
In order to boost its aerospace inventory, Alcoa announced the acquisition of RTI International Metals to be on the cards this March which happens to be a large supplier of fabricated titanium products to customers in the aerospace industry.
In the near past, Alcoa has acquired UK jet-engine specialists Firth Rixson Ltd as well as Germany’s Tital that specializes in titanium and aluminium castings for engines and frames needed in the aerospace industry.
Management provide steady 2015 projections
According to William Oplinger, Alcoa’s chief financial officer, demand for aluminium remained strong during the quarter and he quoted, “China continues to add capacity. Smelters have been reluctant to curtail as prices have recovered. The industry needs metal to operate. So as metal comes out of inventory it is being absorbed through higher demand.”
The positivity in the management tone is reflected in the projected numbers for the fiscal year 2015. Alcoa predicts that global growth in the aerospace sector would reach 9%-10% through 2015. Also, the global automobile production is estimated to increase 2%-4% during the year, with 1%-4% improvement in North American region.
Alcoa also estimates a 5%-7% global sales growth in the commercial building and construction market. Further predictions by the aluminium conglomerate include 1%-3% worldwide airfoil market growth in the industrial gas turbine sector, as well as a 2%-3% global sales increase in the packaging sector. All such factors would possibly aid in improving the top and bottom lines of its operating business lines during the fiscal year 2015.
Parting words
Analysts are giving Alcoa a "buy" rating, thanks to the company’s varied strengths. The strengths include revenue growth, impressive EPS growth, compelling growth in net income, positive cash flow from operations and a strong financial position with reasonable and manageable debt levels. Also, the first quarter earnings could stimulate the investors in the market to grab shares of Alcoa at this juncture. Let’s stay tuned and keep watching while the aluminium producer keeps making new strategies to grow in every business domain it operates in the near future.
